IMF plans for bank tax panned by global finance community

IMF MD Dominique Strauss-Kahn

Unprecedented proposals for a banks’ tax have been dealt a severe blow by advisers, banking representatives, and academics.

Accountancy experts warned that the International Monetary Fund’s (IMF) plan to create a levy and tax on profits and remuneration would be almost impossible to enforce, and cause a tug of war between tax agencies for control of the funds.

To compound the situation, they believe there would be an increase in tax avoidance, at best, and evasion at worst.

The global nature of the banking industry means transactions can be conducted from virtually any location and, unless every country in the world signed up to the tax and implemented identical policies, it would drive business to the locations that had not endorsed the move, advisers said.

Michel Taly, an adviser at French firm Arsene Taxand and a former manager in the tax legislation department of the French finance ministry, said the levy would be a sales tax, not an income tax, and this would cause huge implementation problems in banking and insurance operations.

Understanding where responsibility for a transaction originates is not always clear cut, which could create uncertainty over who was responsible to pay the tax.

“When you are dealing with money and not goods, it’s very hard to say who is selling what,” said Taly. “For instance, when a bank does foreign exchange between euros and dollars, does that constitute a sale or a purchase? Would you have to tax twice on both sides of the transaction?”

Academics agreed that there would be a spike in tax planning and called for the IMF to clarify the terms if the money it was trying to generate for future bailouts wasn’t to fall through the cracks.

“All [the IMF] is doing is outlining, but it needs to clarify how this will work. There are any number of off balance-sheet activities that can easily be located in foreign jurisdictions,” said Mike Devereux, director of Oxford University’s Said Centre for Business Taxation. “It is almost inevitable that there will be an increase in banks looking to arrange their tax affairs in the most efficient way possible.”

The level of multilateral co-operation necessary to agree a workable tax system would be unprecedented, Devereux added.

Taly said: “The game among the companies affected will be how to avoid the tax.”

There has already been a backlash against the IMF’s plans. The world’s 80 largest insurance groups have written to the G20 group of nations to protest at their industry’s inclusion in proposals for a global financial services tax.

The G20 has also called for the IMF to go back to the drawing board and flesh out its proposals, while banking representatives also voiced concerns on the collection issues and the degree of multilateral co-operation needed for the proposals to work.

“There could be a territorial issue for collecting the money and everybody around the world would have to sign up for it,” a BBA spokeswoman said.
“The UK must not be put at a competitive disadvantage. Clearly there are some countries who are less inclined to do this and you risk creating little tax havens,” she added.

Policymakers and tax collectors are reserving judgment on the feasibility issue of the IMF’s plan.

Because of the upcoming election, the Treasury said it was not in a position to comment on government policy, while HMRC said it could only comment when government policy had been introduced into law.

IN OUR VIEW

The IMF has the best intentions at heart, but its plan is clearly flawed. Perhaps the body should call on the detractors to consult on how the plan could be made watertight so no institution sidesteps the levy or the tax on profits and pay.

Further reading:

imf.org